TRILLION DOLLAR BABY: How Norway beat the oil giants and won a lasting fortune

AUTHOR: Paul Cleary is a prominent Australian journalist who has documented the politics and economics of resource extraction for more than a decade. He served as an advisor to the Government of East Timor on resource-sector governance and negotiations. He has [...]

TRILLION DOLLAR BABY: How Norway beat the oil giants and won a lasting fortune

AUTHOR: Paul Cleary is a prominent Australian journalist who has documented the politics and economics of resource extraction for more than a decade. He served as an advisor to the Government of East Timor on resource-sector governance and negotiations. He has a doctorate from the Australian National University.

COMMENTATOR: Brian Harrisson was formerly a Corporate Financial Executive, Public Accounting Practitioner, Mining Company Director and Business Strategist. He is a fellow of CPA Australia, is now retired and lives with his wife, in Melbourne. He originally graduated in Industrial Accounting later in Economics and Politics and later still in, Advanced Taxation Law. His website is at www.brians-satchel.com .The site was developed to provide considered opinions on issues of community importance.

APPROXIMATE WORD COUNT: 4,000

DATE: 16th November, 2016

COMMENTARY ON BOOK

INTRODUCTION

This essay was visualized as a ‘book review’ however because of its ultimate focus has been more appropriately described as a ‘commentary’.

The book tells the story of the ultimately successful development of Norway’s offshore oil wealth for the benefit of the Norwegian people. It began in the 1960’s and continues to this day. The book takes its readers through the key events and outlines the activities of some of the major players involved in the history of the period. The narrative is derived from a wide range of sources that include official documentation and interviews with major players in the saga, giving the book a high degree of authenticity. This perception is enhanced by the comprehensive nature of the ‘End Notes’, references, bibliography and the books index. The appendices include ‘Norway’s 10 commandments that guided government decision-making on the development of the resource, while the historical chronology included early in the book gives the reader an overview of the broader Norwegian history into which the period under consideration can be fitted.

The successful development of the resource is impressive when it is realized that developments in many resource rich countries including wealthy free market western democracies, have been less than auspicious where success in this context is measured by the extent to which the project’s objective is achieved. This was to obtain the major share of the value flowing from the resource exploitation for the Norwegian people, and its corollary, avoiding the ‘Resource Curse’, a term coined to describe the paradox whereby the economies of well-resourced countries, are commonly damaged in some way by the exploitation of the resource. The narrative does not directly address the question of ‘why’ Norway was so successful while its well resource-endowed free market democratic peers such as Canada, United Kingdom and Australia, were less so, but it does provide some hints.

The active role the Norwegian government played in the management and operation of the project provides one likely explanation. I labelled the system Norway used as, the Norwegian model (NM)[1]. This contrasts with its peers which followed the more ‘traditional’ Free market economic model (FMEM) to develop their projects. Under this model international and/or domestic private sector corporations are traditionally licenced to undertake the developments (essentially, on behalf of themselves), and accordingly gain much of the value from a project. Under this model, governments have in general also provide massive production subsidies[2] to carbon fuel companies and activities, making the returns achieved by these private entities, even greater.

It will be argued later that the Norwegian experience was significant, but before explaining why, each model is considered in more detail to provide a context for the explanation.

THE MODELS

The Norwegian model (NM)

The critical nature of the government’s active involvement in the project has already been noted. A key administrative step of this involvement was taken in 1963 when, in response to the Phillips Petroleum offer to pay it $US163,000 per month to acquire exclusive rights over the Norwegian continental shelf, the government declared sovereignty over the shelf. This gave it the sole right to grant licences for the exploration and production of oil from the location. At that stage, no one had any idea about just how vast the resources under the seabed, were.

Having set the scene, the government took control by developing the policies, strategies and plans to achieve its objective. It acquired the tools, institutions and skills that enabled it to manage the project as required. These included: (a) Taking a direct stake in the oil and gas producing areas through ‘Statoil’, its own corporation formed to act as both the holder of the equity stake and operator (head contractor) in the oilfields. (b) Seconding Norwegian engineers to work in the international oil corporations to gain experience in and knowledge about the petroleum industry and the way their international ‘partner corporations’ worked. (c) Making optimal use of existing resources: The educated, skilled, experienced and corruption free bureaucracy ensured that the development of the resources met the required rules. The bureaucracy had had experience in dealing with powerful foreign corporations during the period of the development of Norway’s Hydro-electric resources and put this experience to good effect. (d) Requiring that any onshore processing facilities planned, were established in Norway and that Norwegians were favoured for the jobs that became available.

As part of this, the government developed ‘Team Norway’[3] thereby ensuring that the Norwegian people were aware of and supported what the government was trying to achieve. ‘Norway’s ten commandments’, the rules applied to developments, were promulgated for all to see. Critically, the conservative opposition party supported the objective of the project and this prevented the foreign corporations using the ‘divide and rule strategy’ they have successfully used in other countries.

It established rigorous Taxation integrity rules: These defined the principles of pricing the output from the project and its cost base. These were aimed to ‘drive a stake’ through the heart of the dubious taxation strategies global corporations commonly employ to avoid taxation in countries in which they earned profits. On the other hand, the government ensured that an adequate return on Investment was in prospect for its large corporate international partners, to maintain their interest in the project.

The success of these processes was both tangible and significant for the Norwegian people and their businesses. Norway has the highest standard of living in the world, a growing economy with a thriving business sector and has balanced this with a wide-ranging system of social justice that includes universal free access to a first-class education and health care facilities. Importantly, the development avoided the extreme movement of income and wealth in favour of the top 10% of the population, that is common in western democracies that operate under the FMEM.

The ultimate economic success of the development is reflected in comparative ‘balance sheets’ of the country. In 1970 the country had net foreign liabilities, equivalent to 40% of GDP. By 2016 this had been transformed into net foreign assets, equivalent to 185% of GDP. Most of the money is held in the Norwegian Sovereign Wealth Fund which currently totals $US 870b. This astute move not only provided a pool of savings to help Norway deal with future challenges. The accumulation and investment of the funds overseas helped avoid potentially destructive currency driven rises in export prices that would otherwise have occurred, thus avoiding one of the typical ‘Resource curse effects’.

The success reflected in the 2016 balance sheet, should not obscure the fact that problems were encountered during the journey to that point. Oversen[4] indicated that during the 1970’s the world was adversely affected by the breakdown of the Bretton Woods system in 1971 and the oil price shock following the YOM Kippur war in 1973. The counter cyclical policies that the government introduced to deal with the resulting global economic downturn, triggered a surge in wages and costs that spilled over into its tradable sector causing the economy to overheat, causing inflation and crowding out of the non-oil trading sector. In the 1980’s a credit liberalization caused another overheating with near fatal consequences when the oil price collapsed in 1986. Up to the mid 1990’s the country had spent most of its oil revenues, a large part of which had been reinvested in the petroleum sector. Lessons from these apparent excesses accentuated by the lack of adequate savings from the project begun to lead to remedies. One of these came in the form of the Norwegian Petroleum Fund which was established in 1990. The first financial allocations were made to it in 1996. In 2001 government renamed the fund, Government Pension Fund-Global (GPFG) and introduced a framework for the sound and sustainable management of petroleum revenues.

Another unfortunate outcome between 1967 and 2016 was that there were over 300 lives lost during the developmental journey. As well, some environmentalists expressed dissatisfaction with the country’s trajectory. They considered that the increasing oil production was worsening the already problematic anthropogenic driven, warming of the planet and criticized ‘Statoil’s’ plans to drill in the pristine arctic region. This criticism was accentuated by the earlier 23rd, and the more recent 24th licensing rounds, which permit oil companies to explore for the significant fossil fuel resources believed to exist in the Norwegian sector of the Barents Sea[5].

A government ‘white paper’[6] prepared in 2013, covering the long-term perspectives on the Norwegian economy, showed that it is aware of the criticisms and has put strategies in place to mitigate some of the criticisms. This included a requirement that the Sovereign Fund dispose of any investments in coal companies that it held. The country has had a record of generating a large proportion of its power needs from clean renewable hydro-electric facilities and invests in clean energy research.

In the planning and development of its non-renewable resources, the Norwegian government made choices in this increasingly complex world to address the many challenges it confronted. It seemed to have tried to balance, the needs of its people with a range of other challenges. These include demands arising from the warming of the planet, the world’s strategic need for fuel and the less than enthusiastic response of the international community to commit to binding emissions targets that aim to mitigate the rate of global warming. In the end, a reader’s judgement about of the country’s trajectory will be governed by his/her own set of values. These may lead people to compare Norway’s actions with those of other oil rich countries which have also developed their resources in the face of the global warming challenges. They might also think about just how tardy and inadequate the international community have been in their responses to pressures for binding emissions targets. People might also think about the potential strategic risks this small country might have faced in this less than ideal and fraught world, had it not undertaken the development of its vast oil resources.

The Free market economic model (FMEM)

In most liberal ‘free market’ western democracies, this model is used to manage and guide their political economies. The model has political and economic dimensions each of which exerts a powerful and reinforcing influence on the other. The political dimension is often described as Neoliberal politics while the economic dimension of the model is invariably represented by the principles of the ‘Neo-classical economic paradigm’ otherwise called the ‘Neoliberal economic model’ or simply the ‘Orthodox or mainstream economic model’, for which selected main attributes are outlined below[7]. The US government has had a strategic interest in this model since the end of the second world war. It is no coincidence that there was a resurgence of interest in the model during the cold war. Communism was a threat and the political notion of freedom and its corollary, the ideology of free markets, was at the disposal of the US government. The USA as leader of the western world used the notions of freedom and free markets to devastating effect against its communist opponents. The public contrast was between the free, affluent, glamorous West Berlin and the enslaved, poor, dull communist East Berlin. Most anti-communist countries were deemed to have free market economies and so had the same neo-liberal characteristics as the dominant military power, the United States, whose economy was inaccurately portrayed as the unfettered operation of market forces with a limited role for government. The Pentagon backed Rand Corporation and the US Air-force funded research by the big eight universities in the USA into mathematical economics as a tool of national defence and provided the opportunities for conventional economics to push other economic versions out of the way. Brain[8] has argued that the cold war was one of the primary causes of the corruption of neoliberal mainstream economic thought.

The model received the ultimate impetus in the early 1980’s when the Reagan administration in the USA and the Thatcher administration in the UK, defined ‘government’ as the primary source of their economic problems. This decidedly antagonistic and hypocritical political view expressed by those governments was absorbed by the orthodox economic system and has exerted a powerful influence on both economic theory and policy to this day. In the USA and the UK, the new model was supported by the administrations that followed the Reagan and Thatcher administrations thereby embedding those ideas in the political economies of the US and UK and by association those in the western world from then on. These ideas became the conventional economic wisdom internationally. This was indicated by the behaviour of several of the significant international institutions. The World Bank (WB) made new appointments to the positions of President and Chief Economist in the early 1980’s, after which both the WB and the International Monetary Fund (IMF) became free-market missionaries[9]. Reflecting the new dominance of the free market ideas, their previous policies of eliminating poverty using governments to improve markets in developing countries was revised to one that saw government as the problem, with free market economics providing solutions to all problems. These ideological solutions, which involved the same economic strategy for every country, were collectively described as, the ‘Washington Consensus’, a consensus between the WB, the IMF and the US Treasury about the so called ‘right’ policies for developing countries. (A cynic might also observe that the ‘consensus’ appeared to benefit the international financial institutions significantly.) The policies included granting loans that were made conditional on the borrowing countries implementing the so call Washington consensus policies. The free market oriented institutions also include the World Trade Organization (WTO). Trade agreements it sponsors, such as the Trans Pacific Partnership agreement (TPP), typically contain dispute resolution procedures which can effectively be used to override, the laws of the land of participant parties even if those laws are passed to protect its people from reprehensible corporate behaviour[10]. Hearings of WTO tribunals set up to hear disputes are held in camera so that rulings of the tribunals can hardly be called transparently arrived at.

The free trade mantras preached and applied by developed countries and their international institutions referred to, typically worsen the distribution of income and wealth in favour small powerful minorities within countries. This problem is accentuated by the fact that the ‘Conventional or neoclassical economic model’ which is a major driver of that outcome, is the only system of economic thought taught in the main universities in the USA and elsewhere in the western world thus effectively mediating a monopoly on economic ideas within western academia and hence within the domain of the west. Notwithstanding the somewhat dubious assertions of its academic and professional supporters, that the neo-classical economic model is a science, the model is based on value judgements and thus has an ideological dimension[11] making such an assertion spurious. This spurious behaviour can be at least partially explained by one seemingly inevitable and common outcome in all countries that use the FMEM. It typically produces large skewed maldistributions of income and wealth, that favour a small group of powerful and wealthy people within a country in which it operates. This no doubt explains why the model still has such widespread support throughout the halls of power in western world.

Selected theoretical attributes of the Free market model can be described as follows: (a) Markets: Are typically free and populated with many buyers and sellers who are rational and perfectly informed (b) Minimal government: Markets should be free and subject to a minimum of government interference. (c) Competition: This mediates prices which vary with supply and demand. No one competitor can control prices. (d) Efficiency: Competitors competing in free markets will produce the most efficient economic outcomes. (e) Taxation: Taxation should be low. The model does not recognize the role that power plays in the distribution of income and wealth within a country in which the model operates

COMPARISON

A simplified comparison of key aspects of each model is shown below:

THE NORWEGIAN APPROACH

IMPLIED CRITICISM OF NORWAYS APPROACH BASED ON THE FMEM

Government set primary objective

Planning interferes in the operation of the free market which achieves the most efficient outcomes.

Government managed project towards objectives

Governments should leave those activities to the private sector which does them best.

Government facilitated national cooperation

Cooperation is incompatible with competition which achieves efficient outcomes.

Taxation used to maximize government’s share of projects value

Taxation should be minimized

Government ensured that corporate partners earned an adequate Return on investment (ROI)

Adequate ROI consistent with a project’s risk profile is a prerequisite of private investment.

SIGNIFICANCE

Norway based its resource development on an economic model that is different to the model adopted by most of its democratic peers. Although some might ask ‘So what?’, the fact is that the ideology of the FMEM was one of the glues that bound the western alliance together during the cold war and still does. It has also been a vehicle for delivering significant income and wealth to powerful private vested interests resulting in large maldistributions of income and wealth in their favour, both within and between countries. It has powerful support throughout the western world, albeit for less than altruistic reasons. By showing that there is an alternative model of resource development within the capitalist system, that avoids those inequities, while also being efficient, the Norwegian model directly challenges the free market model and its ideology. The Norwegian experience therefore gives rise to a paradox. On the one hand, the experience has provided a light on the hill for countries that are anxious to maximize their share of the value from their resource developments, for their people. On the other hand, in doing so it has challenged the private powerful interests that have benefited so significantly from such projects, and their governments that support them. These interested parties are therefore likely to perceive the Norwegian model of development as a looming threat to be dealt with. Thomas Piketty[12] has shown that vested interests have responded decisively when their sources of income and wealth are challenged. Although it is not clear what form these reactions might take in this modern fast-changing world with a new US President elect, there will surely be such reactions.

CONCLUSIONS

This book has not only provided a fine historical account of the development and exploitation of the massive oil resources within the territory of Norway, it can also be perceived as a ‘how to manual’ for resource endowed countries, which like Norway, want to reserve a greater share of resource development benefits for their people, however even if earnestly pursued, this outcome may not be as easily achievable in today’s world.

It may be validly argued that the Norwegian experience was a special case, because the country already had a lot going for it, which many other countries, especially developing countries, do not. This is partly because Norway does not have the extreme internal barriers that impede rational resource developments in other countries. These barriers include such phenomena as endemic corruption, ethnic and religious differences, and unstable political systems that enable international corporations to turn those barriers to their own advantage. The Norwegian experience can also be regarded as a special case partly because times have changed for the worse since the start of the development. There are at least two reasons for this. First since the start of the Norwegian development in the early 1960’s the country was an ally and part of the western alliance. At that stage, the cold war was at a critical point and it is unlikely that Western powers and by extension, their associated vested interests, would have been prepared to initiate any acts, that would have upset Norway. The reason seems clear-enough. The potential strategic costs of an upset ally at the time would have been far greater than the potential value of any offsetting financial gain[13] that might have flowed to international corporations from a completely privatized development. The cold war is now over, so that reasoning may not now apply to new prospective resource developments. Second, the Norwegian development started, well before the early 1980’s, when the actions of the Reagan administration in the USA and the Thatcher administration in the UK made the term ‘government’, a dirty word, so the government driven Norwegian development was not necessarily an area of focus within the west. This ideological notion is in full flight today and is supported in the west by governments and interests with a driven attachment to the notion of the ‘free market’. This is likely to make them antipathetic towards the widespread democratization of future developments and make life more difficult for countries which seek to replicate the Norwegian experience. History viewed from a future perspective will inform us whether the Norwegian experience ultimately turns out to be a force for good, for the people in resource rich countries or whether the experience will be subsumed by the power of the free market, its ideology and the powerful vested interests that benefit from it.

Finally, as well as outlining an important period of history and providing a ‘how to’ handbook for countries which aspire to benefit from the Norwegian experience, the book also provides a range of insights and valuable leads into important international challenges. The book is highly recommended to the general reader, political and economic progressives and to people with an interest in the fields of international politics and economics.

Brian Harrisson

NOTES

[1] A term the reviewer developed to encapsulate the systemic approach the Norwegian government followed in the development of its resource

[10] An example is action taken against Australia under the WTO rules by the tobacco industry, for passing a law that requires cigarettes to have plain packaging. A summary of the issues involved is available (consulted November 11, 2016) at: https://www.ag.gov.au/tobaccoplainpackaging.

[12] The term ‘vested interests’ is intended to refer to the same interests Thomas Piketty, in his book CAPITAL in the 21st Century, (The Bel-knap Press of Harvard University Press, 2014) referred to as ‘forces of divergence’. The term refers to those interests which drive processes that lead to diverging equality within a country

[13] Wealth derives from power, so in any competition between the two, the latter will always prevail over the former.

The argument herein was originally included in an essay submitted for publication in an international humanities journal, but was subsequently deleted for reasons of space limitation. Although the argument was ranked lower than others remaining for purposes of that essay, it is nevertheless regarded as important and so is made [...]

The argument herein was originally included in an essay submitted for publication in an international humanities journal, but was subsequently deleted for reasons of space limitation. Although the argument was ranked lower than others remaining for purposes of that essay, it is nevertheless regarded as important and so is made publicly available on this site, to readers. If the essay is not published this paper will be removed from the site. If the essay is published this paper will be modified to include the name of the journal to which it refers.

The argument

The notion of the efficient free markets with minimum government involvement, an important precept underlying the current neoclassical paradigm, had its genesis in the ideas of Adam Smith (1723–1790), the preeminent Worldly Philosopher[i] who in his renowned book The Wealth of Nations wrote inter alia, about how individuals working in their own self-interest benefit their society through his so called invisible hand effect:

He [every individual] generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. [para] by preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which is no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. (Smith, 2010: 240)[ii].

His book provided one of the foundations for classical and later neoclassical economics. In interpreting Smiths work orthodox theorists ignored the philosophical context of his work, set out in his book, The Theory of Moral Sentiments (Moral sentiments). Smith had always made clear that government should be strong in umpiring the great game of the market economy[iii]. The need for a meaningful role for government in the economy is also reflected in Smith’s notion that “If justice is removed, the great, the immense fabric of human society…must in a moment crumble into atoms”. (Bolderman, 2007: 1). Smith also said:

The wise and virtuous man is at all times willing that his own private interests should be sacrificed to the public interest of his own particular order of society… He is at all times willing, too, that the interest of that order or society should be sacrificed to the greater interest of the state or sovereignty, of which of which it is only a subordinate part. (Smith, undated [1759]: 204).

Braham (2006: abstract) pointed out that:

Contrary to belief among many economists and libertarian philosophers, Smith’s idea of justice was not simply the protection of a person’s property rights but also a protection from violation of their human dignity’… and …’protecting a person’s dignity turns out to be …a matter of protecting their material livelihood and the opportunities to develop their mental and moral capabilities…

It is clear that Smith envisaged an active role for Governments in society and the economy to ensure, inter alia, the achievement of justice. In contrast, orthodox economic theorists of the time portrayed a different picture of his ideas. They used those parts of Smiths thinking that suited the propertied classes while ignoring his thinking and concern for moral sentiment and justice expounded in his book Moral sentiments (Bolderman, 2007:19-20). This misleading portrayal is reflected in the older classical economic ideas and continues to be reflected in the modern version of those ideas, referred to as the ‘neoclassical economic paradigm’.

Economic theorists of old also distorted the ideas of the utilitarian philosophers. Bentham (1748–1832), used the phrase ‘greatest happiness of the greatest number” to describe utilitarianism (Titus and Smith, 1974, 124). Mill (1806–1873), accepted Bentham’s notion and argued that human beings are not satisfied with utility that represents the pleasures of the body or that resulting from the acquisition of things, but by those defined by higher pleasures of the mind (Titus and Smith, 1974: 124). Economic theorists distorted these ideas in two ways. First they portrayed utility as an individual quality driven quality reflected in the behavior of ‘Homo Economicus’ (whose rational self-centered behavioral patterns are assumed to be typical of players in markets. This contrasts with the social/community focused quality that Bentham intended. Second they portrayed utility as self-satisficing pleasure obtained from the consumption of goods and services, rather than from pleasures of the mind as visualized by Mills.

The distorted utilitarian ideas still form part of the neoclassical framework. When the selectively filtered ideas of the Worldly Philosophers are combined with the orthodox normative[iv] approach to economics (a value laden concept in itself), the system of neoclassical economics can be perceived as being based on a series of arbitrary constructs derived as much from the prejudices and values of theorists sympathetic to the propertied classes, as from empirically derived evidence. This approach hardly represents a sound foundation on which to build a science of economics in the spirit of Physics, as orthodox economic theoreticians aspire to do. Such models can be expected to produce unreliable real world projections and policy actions that favor the modern day version of the property classes.

The outcomes from the economic events in the USA during the period of neoclassical dominance (1981 to 2008) are consistent with these expectations. The answer to the question, represented by the essays title, is likely to be, yes.

20 July 2014

Endnotes

[i] Heilbronner (1991) used this term to describe the great economic thinkers.

[ii] Smith’s original book was published in 1776 under the title of ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ and is generally referred to by its shortened title ‘The Wealth of Nations’. The publisher Capstone refers to the edition as ‘a selected edition for the contemporary reader.

[iii] See forward by Butler pp vii and viii in, Smith (2010)

[iv] Normative economics is concerned with judgments about ‘what ought to be’ in contrast to positive economics which is concerned with ‘what is’ (Bannock and Baxter, 2011: Normative economics)

The September, 2012 edition of “INTHEBLACK”, the monthly magazine of CPA Australia, contained articles by three authors putting their viewpoints about the merits or otherwise of allowing firms or industries to import foreign workers into Australia. Industry leaders fear that major projects in the mining, construction and other sectors may be abandoned without significant [...]

The September, 2012 edition of “INTHEBLACK”, the monthly magazine of CPA Australia, contained articles by three authors putting their viewpoints about the merits or otherwise of allowing firms or industries to import foreign workers into Australia. Industry leaders fear that major projects in the mining, construction and other sectors may be abandoned without significant numbers of skilled foreign workers, while the Australian Council of Trade Unions (ACTU) argues that the mining industry in particular should invest in secure permanent jobs for Australians before considering that option.

The issue is obviously very important as it involves a complex and potentially turbulent mix of political, economic, industrial, social justice and even ethical issues. There are no simple solutions. The three authors who provide alternative viewpoints on the issue are Peter McDonald, a demographic Researcher at the Australian National University (ANU), David Byers, Energy Industry leader with the Australian Petroleum & Exploration Association (APEA) and Jason Greene, Recruitment specialist at Skills Shortage Solutions. All are well experienced in their fields and give considered views that are worth a read.

My views are expressed in a letter to the Magazine. It was published in the November, 2012 edition. It is shown below.

Brian Harrisson

20th January, 2013

The Editor,

INTHEBLACK magazine

Dear Editor,

Your excellent articles (INTHEBLACK” September 2012) about the importation of labour highlight an important but potentially divisive and economically damaging issue that needs to be addressed. At present Aussie jobs are rightly reserved for Aussies. The mining industry asserts that this principle is damaging Australia’s future. If this is true the issue needs to be addressed.

The problems of skills shortages and a lack of labour mobility are not new phenomena. The cyclical nature of the demand for minerals, the remoteness of projects, and the lumpy nature of project expenditures have exacerbated these problems. Governments have failed to develop appropriate policies and mining corporations have failed to adequately deal with issues of personal isolation, economics and training, contributing to the problems.

Two things are needed. First, Governments, Industry and unions should identify the key social and economic issues involved and develop strategies to avoid these problems in the future. Second, while this work is in train the principle of “Aussie jobs for Aussies” should be temporarily suspended provided that it is backed with adequate quid pro quo conditions and policies, such as:

Protection against the exploitation of workers.

Equality of pay and conditions.

Values. Encouraging Emigrant workers to adopt Australian values.

Australian content. Projects that use emigrant labour should be required to buy 50% of project materials by value from Australian sources.

Levy. Miners who use emigrant workers should be subject to a training levy which should go towards funding new labour training policies, if they are not liable to pay the new mining profits tax.

Refugees. Where possible refugees should be built into the strategy.

Sunset clause. The suspension of the principle should be temporary so legislation should have a limited life.

A recent technical paper has challenged one of the golden rules of exploration namely that angled drill holes detect dipping targets more effectively than vertical holes.

The paper has its origin in the Central Victorian goldfields where the author was a member of the management team in a small mining company exploring for gold in the Rheola/Moliagul district. In this district where gold forms narrow veins, is nuggetty and difficult to find, the golden rule is of little practical value. In fact a search of the geo-scientific literature did not find any papers or texts that provided a convincing

theoretical justification for the golden rule so the author developed a detection model from scratch based on conventional probability concepts. The model showed that based on data for the area being explored vertical drilling has a higher chance of detecting a target than angled drilling irrespective of its geometry or orientation. It further showed that this outcome will not be limited to the particular conditions that apply in the Central Goldfields, but will apply to exploration in general.

While these conclusions are at odds with the golden rule the paper also shows that the golden rule is flawed and promotes less than optimal drilling strategies. Where chance is influential significant improvements can be expected by putting drilling on a sounder theoretical basis.

Abstract:
The paper examines the conventional belief that angled holes are more detection effective than vertical holes with dipping targets. The examination uses a binomial probability framework.

Analysis in two and three dimensions shows that all holes can be evaluated for detection effectiveness in three dimensions but only standard vertical holes can be in two dimensions.

A programme of standard vertical holes using its two-dimensional advantage had a higher detection capability than one of standard angled holes irrespective of the target’s orientation. Although this outcome is at odds with the conventional model, the paper shows that the conventional model contains fundamental flaws. It identifies their source and explains why they occurred.

These flaws together with evidence provided by the binomial model lead the paper to conclude that the conventional belief cannot be sustained. The financial implications of this conclusion for the industry are significant.

The author (Delingpole) claims that, Western Governments and climate scientists are parties in a conspiracy to deceive their publics into believing that human activities are causing the planet to warm, when the truth is that the planet is not warming. His attempts to support this claim are rich in hyperbole and short on [...]

The author (Delingpole) claims that, Western Governments and climate scientists are parties in a conspiracy to deceive their publics into believing that human activities are causing the planet to warm, when the truth is that the planet is not warming. His attempts to support this claim are rich in hyperbole and short on facts.

The book fails to, demonstrate that there is such a conspiracy or rebut the evidence that the planet is warming (Climate Change).

A heated debate began when the Australian Government announced an initial carbon tax with a move within a few years to a full emissions trading scheme (ETS). Like others I have political views but I think that this issue is of such importance to Australia and indeed the world that it transcends political party loyalties. [...]

A heated debate began when the Australian Government announced an initial carbon tax with a move within a few years to a full emissions trading scheme (ETS). Like others I have political views but I think that this issue is of such importance to Australia and indeed the world that it transcends political party loyalties. The evidence shows that:

There is a carbon problem: – The overwhelming weight of reputable scientific opinion is that the planet is warming and that emissions of CO2 and other gasses caused by human activity, is likely to have caused it. The affects of warming on people’s lives are predicted to fall within the range dangerous to catastrophic depending on the extent of warming. To minimize damage the world has to limit warming to acceptable levels. To do this the world needs to initially stabilize then reduce emissions as much and as quickly, as possible.

There is a solution: – Nearly 70% of Australian economists consider that the most effective way to reduce human activity generated carbon emissions is to put a price on carbon. This can be achieved either by means of carbon tax where the Government sets the carbon price and the market effectively sets the allowed quantity of carbon emissions or, by means of an ETS (Emissions Trading Scheme) where the Government sets the levels of carbon emissions permitted and the market sets the price. In both of these approaches the market does the heavy lifting.

Putting a price on carbon is clearly the way to deal with the problem provided that it is backed with other carbon reduction strategies and policies that, encourage and support, innovation, clean energy, other carbon mitigation schemes, our trade exposed industries and Australians during the transition to a cleaner sustainable life. For those Australians who genuinely have doubts about whether global warming is occurring, the safest way to go is to adopt the precautionary principle. That is is to assume the worst and act accordingly.

Vested interests supported by some sections of the media have been bagging the carbon tax with a combination half truths and misrepresentation mixed in with some truths to give their comments some credibility. Take these examples:

• “The carbon tax will destroy the Australian steel industry.”

This message is powerful but inherently misleading. The industry is suffering but this is because of the mining boom. The boom has substantially increased the cost of the industry’s raw materials while the rising $A has reduced annual export income by 30% over a recent period, severely eroding the industry’s profitability. The affect of a carbon tax will be mild. When applied, a carbon tax of $A23 ton/CO2 net of Government assistance, will increase steelmaking costs by less than 1% and this can be reduced by introducing clean energy technology in the steelmaking process. It is noted in passing that large mining projects in Australia use a low proportion of Australian steel.

• “The carbon tax will destroy our coal industry and many jobs.”

As intended, a carbon tax will reduce the demand for the industry’s products in Australia and is likely to also do so internationally when high coal consuming countries introduce carbon pricing. This is likely to cost jobs in the long run unless the industry innovates towards cleaner coal. What is conveniently ignored is that up to now the industry has had an inside run because the costs of coal generated pollution have been borne by communities, giving the industry’s products a pricing advantage over non polluting competitive products that do not cause such costs. Putting a price on carbon will do no more than level the playing field. It should also encourage coal producers to innovate towards cleaner coal.

• “The tax will reduce people’s living standards.”

The proportion of GDP paid by Australians in taxes is already one of the lowest in the developed world. Even so the Government has advised that the majority of revenue from the tax will be used to offset the ongoing affects of the pricing of carbon, on the COL for Low and middle income earners and to help specified industries. There is an equity case for not giving such assistance to higher income earners. As well this group have, and are still benefiting disproportionately from, significant taxation concessions and lower tax rates legislated in earlier periods.

• “Australia’s pollution is a miniscule proportion of world emissions so why worry.”

Australia’s aggregate share of world CO2 emissions at < 2% is small on a global basis. As polluters in this category account for 26% of CO2 emissions worldwide this argument is asserting that the world should not worry about one quarter of its emissions. The argument implies that we should continue with technology that is now known to be dirty and obsolete, and that this should be at the expense of a cleaner future and the economic opportunities that this will present. The argument ignores the effect that leadership by Australia can have on countries vacillating on the carbon issue. It also ignores the damage that a changing climate can wreak on our country’s economy and the agricultural sector in particular.

• “We should wait until the US moves.”

The US is a large emitter by any measure but its political and economic power is carbon dependent and the carbon lobby is powerful. The country is confronted by economic, political and social problems that work against rocking the carbon boat. The US Federal government might never embrace a price on carbon or, may do so only when it is too late. Given the potential immensity of what is at stake, just waiting for something that might never happen is not strategically sensible.

• “Whatever CO2 we save in a year will be overwhelmed by China in days, so why bother.”

If that argument is followed most countries would not bother to take any action. China is the largest polluter in aggregate and it’s pollution is anticipated to grow. It has the largest population and wants to achieve living standards perhaps like that enjoyed in developed countries. Who can deny the chinese people that aspiration? Even so China is a world leader in developing and manufacturing clean technology. Reports indicate that it is investing more in clean energy than anyone else in the world and has the largest reforestation programme in the world. It should not be forgotten that a large part of China’s emissions has been caused by demand from the west which has transferred many of its manufacturing and hence pollution problems to China. This follows 150 years of industrial activity during which time the west pumped large amounts of emissions into the atmosphere thereby creating the basis for the climate problem in the first place. We, as the largest polluter in the world on a per capita basis, encourage China to reduce its levels of pollution, so it would be nothing less than base hypocracy not to take robust action to reduce our own. Europe has shown leadership by putting a price on carbon and we should do the same.

• “A volcano pushes out in a day more CO2 than people push out in a year so the problem is all hype.”

This comment is clearly aimed to mislead. Volcanoes typically emit around 350m/tpa. This compares with annual human emissions of CO2 currently estimated at >30b/tpa and growing.

There are genuine anxieties in communities about how the introduction of a price on carbon will affect their ways of life. Peddling misinformation for whatever reason, will only accentuate those anxieties without providing real solutions, so those involved in doing so should think again. We Australians need a vision to bring us together after considering this question “Do we want to bequeath our kids and successors a clean, bright, sustainable future or do we want to bequeath them a continuation of our dirty, detructive, unsustainable past?”

The Steel Industry uses coal because it is cheap relative to other fuels and appears to typically generate between 2 and 3 tonnes of carbon dioxide equivalent (CO2) per tonne of raw steel produced. Scientists have now alerted Governments to the connection between CO2 emissions [...]

The Steel Industry uses coal because it is cheap relative to other fuels and appears to typically generate between 2 and 3 tonnes of carbon dioxide equivalent (CO2) per tonne of raw steel produced. Scientists have now alerted Governments to the connection between CO2 emissions and global warming and the potential dangers this brings to the world, so there has been a worldwide move to encourage businesses to reduce their CO2 emissions.

Economists indicate that putting a price on carbon is the most efficient way to achieve this. This approach lets the market do the heavy lifting. There are two ways to price carbon. One involves involves Governments putting a levy or carbon tax, on polluters for each tonne of CO2 they produce. The other involves Governments determining the aggregate quantity of carbon emissions permitted by issuing tradeable permits. This is called an Emissions trading scheme or ETS because the market effectively sets the price of carbon. The new Australian scheme will start with a carbon tax and move later to an ETS. The ETS will not be totally market based as the Government has established a carbon price floor below which its price will not be allowed to fall. There are also provisions that aim to promote market efficiency and prevent market manipulation. In both systems however the market does the heavy lifting.

An effective carbon price should make the costs of coal and other dirty fuels more expensive relative to alternative cleaner fuels and over time should encourage business to move towards the latter. A base price of $A23/tonne/CO2 increasing annually is considered likely to achieve this in Australia. Pricing carbon will belatedly level the playing field between clean and dirty energy by making the polluters now pay for the costs to the community that they create, and previously avoided.

The Australian steel industry appears to have a capacity of about 8mtpa. If future capacity usage falls to say 50% as a result from its withdrawl from most of its export markets, crude steel production will be approximately 4mtpa. With with an average of say 2.5tCO2/per tonne raw steel produced, this output would generate approximately 10mt of CO2 annually. At a starting unit carbon tax rate of $23/tCO2 this will attract a carbon tax of $230 million annually to the industry before transitional Government assistance. This assistance will be equal to 94.5% the tax, and is subject to an annual reduction of 1.3%. There will also be assistence of $300 million over 5 years under the Steel transformation plan. The net effect of the tax will result in a small annual cost to the industry.

The timing of the tax appears to be unfortunate as the industry is already suffering from the effects of the mining boom which has increased coal and iron ore prices substantially and has pushed the $A exchange rate to high levels. This challenge to the industry is likely to continue while the mining boom continues and is independent of the whether carbon is or is not priced. As other trade exposed industries are also suffering from the abnormally high exchange rate the Government will have to seriously address this issue quite seperately from the challenges the carbon tax is aimed to address. Briefly I think that a more complete resource rent tax should be applied to the mining industry and the proceeds used to help exchange affected industries like steel weather the “mining boom” storm. This issue is put aside for now.

The long run effect of the carbon tax on the industry’s profitability will depend on an interplay of two main forces namely how the prices of clean energy move relative to those of dirty energy and the industry’s response to the carbon tax package. It is likely that pricing carbon will encourage clean energy innovation and make the costs of clean energy more competitive relative to dirty energy. The likely response of the industry to this and the carbon package is another thing and will depend on the strategic options available to the industry over time. In all cases a likely first step will no doubt be be to try to recover as much of the tax as it can by increasing prices to customers. Optional industry responses after or in combination with that are likely to include:

First, do nothing and play the best game possible with the hand that it has. This is high risk stuff from the viewpoints of all stakeholders and because of this is an unlikely course of action.

A second would be to move production overseas to a country that does not price carbon or source steel requirements from overseas. Steel is of strategic importance and has been a part of our history so any sensible Government would discourage this option.

A third would be to continue to use coal but sequestrate the carbon in the emissions. My understanding is that there are high hopes for this technology but it is likely to be a long way off.

A fourth and most likely course of industry action would be to try to avoid the affects of the carbon tax by moderating current practice. The most obvious way to do this would be to innovate perhaps by upgrading current operations to clean energy and, or alternatively by building new cutting edge steel plants to do the same. Government assistance sought could include overtures to the mining industry to increase the pitifully low quantity of Australian steel used in mining projects. The type of clean energy used would depend on its relative cost effectiveness compared to other fuels. If either is done successfully the gains would include, savings in the carbon tax, efficiency gains and an improved ability to compete on the world stage.

The pollution problem is however just one of many challenges confronting the nation in a quickly changing world. So perhaps this is a good time to drop old ideas and introduce new ones such as, replace competition within the industry with cooperation perhaps supported with a compact with the Government.

The plants of the two main steel producers in Australia are ageing so perhaps a fifth option is for the industry to rationalize itself. Perhaps through a merger and/or a joint venture of the major players to update of the industry’s technology, capacity and future strategy. The objectives would be to increase efficiency, lower costs, avoid the carbon tax, and enhance its ability to compete on the world stage. One steelmaker already owns its own source of ore and perhaps this could be expanded and shared as part of any joint commercial deal.

The Government could play a role by levelling the playing field. It could tangibly recognize that the reluctance of some countries to bite the global warming bullet is a major cause for concern, given what is at stake for the world. It may consider a policy of giving a subsidy, equivalent to the carbon tax, to trade exposed exports and put a temporary levy equal to the carbon tax on imports from countries that do not price carbon, until they do start to price carbon. Although interference in markets may be anathema to some free market purists and would most likely breach WTO rules, it would be in a good cause namely our contribution to preserving the planet. It raises an interesting dilemma doesn’t it? Is the maintenance of free market principles more important than action to save the planet?

I wrote to Professor Carter towards the end of 2011 advising that I had written a review of his book and said that I planned to post it on my web site early in the new-year. I asked whether he would like to write a response which I indicated would be posted concurrently with the review. Professor [...]

I wrote to Professor Carter towards the end of 2011 advising that I had written a review of his book and said that I planned to post it on my web site early in the new-year. I asked whether he would like to write a response which I indicated would be posted concurrently with the review. Professor Carter’s reply is set out at the end of section 1 of the review.